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Trade deals may now begin to include a labor value content (LVC) rule. Well, at least one trade deal includes the LVC rule. That is the US-Mexico-Canada Agreement (USMCA). Whereas NAFTA set the precedent for many of the trade deals that the United States negotiated afterward, this new requirement in the USMCA could possibly appear in later trade deals.
The USMCA was signed in 2018 and was ratified by Mexico exactly one month ago. The United States and Canada still have to ratify the USMCA.
The LVC rule within the USMCA will impact the automobile industry. In order for automobiles to enjoy the duty-free benefits of the trade agreement, 40 percent of passenger vehicles and 45 percent of a pick-up or cargo vehicle must be manufactured by hourly workers paid a minimum of $16 per hour.
Labor was a side deal to the North American Free Trade Agreement. Furthermore, the labor side deal was criticized for being weak on enforcement. Now, labor is included in the USMCA itself.
The Office of the United States Trade Representative, which negotiates our trade deals, maintains that the use of high-wage labor will: 1) improve jobs for both producers and workers, 2) ensure competitiveness on a level playing field, and 3) lead to more investment in research and development on the part of auto companies.
On the other hand, a study by the Center for Strategic and International Studies (CSIS) argues that the LVC rule does have a downside for consumers, part suppliers, and vehicle manufacturers. The negative impact of increased costs will result in less affordability and lower sales.
This is the time for manufacturers to prepare for such changes, not just with the USMCA, but the possibility of this model for labor standards entering into other trade deals.
Do you have questions about how to prepare for these changes? Ask them on Facebook Live @GRIITAnalysis on Tuesdays at 2 p.m. PST.